what is a sale (gift) - leaseback ?

Sale (Gift) Leaseback Chapter 39Tools & Techniques of

Estate Planning

Copyright 2011, The National Underwriter Company 1

• Sale-leaseback involves a party selling property to another party and then leasing back the same property

• Gift-leaseback involves a party giving property to another party and then leasing back this same property

What Is A Sale (Gift) - Leaseback ?


Estate Planning


• When a client is asset rich and cash flow poor

– Sale of a corporate asset and the immediate leaseback can generate cash without a loss of the use of the asset

• Client earns a large amount of income, is in a high income tax bracket, and wants to divert income to a family member in a lower tax bracket who needs the income

When Is Use Of A Sale (Gift) – Leaseback Appropriate?


Estate Planning


• When a client owns property that is rapidly appreciating and would like to save estate taxes on that future growth

• Client is looking for an alternative to financing business property through a mortgage

– Sale-leasebacks are off balance sheet financing, with the lease obligation appearing as a footnote rather than a liability

– This increases the client’s business credit standing and ability to borrow money

When Is Use Of A Sale (Gift) – Leaseback Appropriate? (cont’d)


Estate Planning


• There must actually be a completed and irrevocable sale or gift

• A legally enforceable lease agreement must exist

• In the case of a sale, the transaction must represent a necessary business operation and not merely exist to shift income tax responsibility

What Are The Requirements?


Estate Planning


• Any rent or lease amount should be reasonable

• The terms of the transaction must be arrived at in an arm’s length bona fide manner

• If a trustee is involved, the trustee should be independent from the grantor of the trust

– When the trust term is over, trust corpus should not return to the grantor

• Under kiddie tax rules, to successfully shift taxation to the bracket of a child, the child must be > age 18

What Are The Requirements? (cont’d)


Estate Planning


• Are the lease provisions, especially payments, strictly enforced?

• Does the lessee pay the entire amount of the promised rent?

• Is the rent reasonable?

• Was the sale price equivalent to the FMV of the property?

• A positive answer to all of these questions is required for a successful shift of income tax burdens and attainment of a rental deduction by the lessee

What Factors Should Be Considered?


Estate Planning


• Is the trust temporary?

• Will the property revert to the grantor at the end of a given period?

• Is the trust or trustee controlled by the grantor?

• A positive answer to any of these questions will result in taxation of income to the grantor

Questions To Ask If A Trust Is Used


Estate Planning


• For a sale-leaseback:

– The corporation that sells an asset in a sale-leaseback must pay tax on any gain realized

– The corporation may take a tax deduction for the fair rental paid for the use of its previously owned property

– Where the property is sold to family members, if the installment payments are close to the rental payments by the seller under the lease, the IRS will contend this is really a transfer with a retained life interest

Tax Implications


Estate Planning


• Under a sale-leaseback, the lessee must report interest income

• Lessee will be able to completely deduct the lease payments as an ordinary and necessary business expense

• If lessee acquires the property and then subsequently sells it, he will be subject to recapture rules relating to cost recovery deductions, as if he had been the owner all along

Tax Implications (cont’d)


Estate Planning


• For a gift-leaseback:– Donor receives a double benefit:

• The business tax deduction for payments of rent

• The rental income paid to the trust or beneficiary will generally be taxed at a lower bracket than the donor’s income tax bracket

– By making an irrevocable gift of the asset, future growth is removed from the client’s estate at no additional estate tax cost

– There may be gift tax implications where the gift is outright or the sales price is less than the FMV of the property

Tax Implications (cont’d)


Estate Planning


• With respect to the sale-leaseback:– If the sale price is later found to be below FMV, the amount

of the gift will be spread between both spouses if the asset was community property

– Consider filing a gift tax return at both the state and federal levels in the year of the sale-leaseback to start the statute of limitations period running on any subsequent imposition of gift taxes, interest, and penalties

• Be sure that valid legal title has passed, and that both spouses have executed the conveying instrument whether it is a gift or sale-leaseback of an asset

Issues In Community Property States

what is a sale (gift) - leaseback ?

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